Argentina puts forward alternative payment plan in bond dispute

By Nate Raymond

Published March 30, 2013

Reuters

NEW YORK, March 30 (Reuters) - Argentina is pitching an alternative payment formula to a U.S. appeals court that would allow it to resolve litigation with creditors holding defaulted bonds for which they are demanding to be paid $1.33 billion.

In a filing late on Friday with the 2nd U.S. Circuit Court of Appeals in New York, Argentina proposed to pay creditors who did not participate in two restructurings through a choice of bonds equal to the debt's value at the time of the country's 2002 default, or through discount bonds.

The offer was under the same terms as those offered to creditors during a 2010 debt swap, a deal already rejected by the holdouts, who are seeking full payment immediately.

And the par-value option was only for investors with less than $50,000 in face value bonds, effectively meaning the hedge fund plaintiffs pursuing the case could really be compensated under Argentina's plan only by taking a big cut to their possible recovery.

Elliott Management affiliate NML Capital Ltd, one of the lead plaintiffs, stands currently to receive $720 million from Argentina following a New York judge's order in November, according to Argentina.

But the discounted bonds NML could take had a market value of just $186.8 million before a major decision in the case last October favoring the holdouts, or $120.6 million as of March 1, the filing said. Argentina estimates NML paid about $48.7 million in 2008 for its stake in the bonds.

"The Republic is prepared to fulfill the terms of this proposal promptly upon Order by the Court by submitting a bill to Congress that ensures its timely implementation," Jonathan Blackman, Argentina's U.S. lawyer, wrote.

The filing was the latest development in the long-running litigation spilling out of Argentina's $100 billion sovereign debt default in 2002. Around 92 percent of its bonds were restructured in 2005 and 2010, with bondholders receiving 25 cents to 29 cents on the dollar.

But holdouts led by NML Capital and Aurelius Capital Management have fought for years for full payment. Argentina calls these funds "vultures."

In October, the 2nd Circuit upheld a trial judge's ruling by finding Argentina had violated a so-called pari passu clause in its bond documents requiring it to treat creditors equally.

U.S. District Judge Thomas Griesa in Manhattan subsequently ordered Argentina in November to pay the $1.33 billion owed to the bondholders into an escrow account by the time of its next interest payment to holders of the exchanged debt.

The 2nd Circuit heard an appeal of that order on Feb. 27. Two days later, it directed Argentina to provide details of "the precise terms of any alternative payment formula and schedule to which it is prepared to commit."

BOND OPTIONS

In its 22-page submission late on Friday, Argentina said that under a so-called par bond option, the bondholders would receive new bonds due in 2038 with the same nominal face value of their current bonds. They would pay 2.5 percent to 5.25 percent a year, Argentina said.

Bondholders would also receive an immediate cash payment similar to what it provided under the 2010 debt swap, Argentina said. And they would receive derivative instruments that provide payments when the country's gross domestic product exceeds 3 percent a year.

The par option, though, is restricted to small investors, unlike the discount option, the more applicable fit for big investors like NML and Aurelius.

Under the discount proposal, holdouts could receive new discount bonds due in 2033 that pay 8.28 percent annually. Argentina said the holdouts would also receive past due interest since 2003 in the form of bonds due in 2017 paying 8.75 percent a year, and GDP-linked derivative units.

Blackman, Argentina's lawyer, wrote that the proposal, unlike what he called the "100 cents on the dollar immediately" formula Griesa adopted, "is consistent with the pari passu clause, longstanding principles of equity, and the Republic's capacity to pay."

It was unclear on Saturday how the court might view Argentina's proposals. The same three-judge panel had said in October, though, that the holdouts "were completely within their rights" to rejected prior debt swap offers.

Euginio Bruno, a lawyer and bond restructuring expert with the law firm Estudio Garrido Abogados in Buenos Aires, said the government's Friday proposal "was within expectations, considering the legal constraints on offering anything better than the terms of the 2010 restructuring."

Argentina has a "lock law" that keeps governments from improving the terms of previous restructurings.

Earlier in the week, the holdouts scored a victory over Argentina when the 2nd Circuit denied a full court review of its October ruling on the equal treatment provision.

The United States had backed Argentina in seeking the review, contending the 2nd Circuit's decision ran "counter to longstanding U.S. efforts to promote orderly restructuring of sovereign debt."

Argentina and holders of its restructured bonds say that granting the holdouts 100 cents on the dollar could complicate future sovereign restructurings around the world.

Argentine Vice President Amado Boudou repeated on Saturday that Argentina would continue repaying investors who participated in the restructuring no matter how the U.S. court case is resolved.

Argentina is pitching an alternative payment formula to a U.S. appeals court that would allow it to resolve litigation with creditors holding defaulted bonds for which they are demanding to be paid $1.33 billion.

In a filing late on Friday with the 2nd U.S. Circuit Court of Appeals in New York, Argentina proposed to pay creditors who did not participate in two restructurings through a choice of bonds equal to the debt's value at the time of the country's 2002 default, or through discount bonds.

The offer was under the same terms as those offered to creditors during a 2010 debt swap, a deal already rejected by the holdouts, who are seeking full payment immediately.

And the par-value option was only for investors with less than $50,000 in face value bonds, effectively meaning the hedge fund plaintiffs pursuing the case could really be compensated under Argentina's plan only by taking a big cut to their possible recovery.

Elliott Management affiliate NML Capital Ltd, one of the lead plaintiffs, stands currently to receive $720 million from Argentina following a New York judge's order in November, according to Argentina.

But the discounted bonds NML could take had a market value of just $186.8 million before a major decision in the case last October favoring the holdouts, or $120.6 million as of March 1, the filing said. Argentina estimates NML paid about $48.7 million in 2008 for its stake in the bonds.

"The Republic is prepared to fulfill the terms of this proposal promptly upon Order by the Court by submitting a bill to Congress that ensures its timely implementation," Jonathan Blackman, Argentina's U.S. lawyer, wrote.

The filing was the latest development in the long-running litigation spilling out of Argentina's $100 billion sovereign debt default in 2002. Around 92 percent of its bonds were restructured in 2005 and 2010, with bondholders receiving 25 cents to 29 cents on the dollar.

But holdouts led by NML Capital and Aurelius Capital Management have fought for years for full payment. Argentina calls these funds "vultures."

In October, the 2nd Circuit upheld a trial judge's ruling by finding Argentina had violated a so-called pari passu clause in its bond documents requiring it to treat creditors equally.

U.S. District Judge Thomas Griesa in Manhattan subsequently ordered Argentina in November to pay the $1.33 billion owed to the bondholders into an escrow account by the time of its next interest payment to holders of the exchanged debt.

The 2nd Circuit heard an appeal of that order on Feb. 27. Two days later, it directed Argentina to provide details of "the precise terms of any alternative payment formula and schedule to which it is prepared to commit."

BOND OPTIONS

In its 22-page submission late on Friday, Argentina said that under a so-called par bond option, the bondholders would receive new bonds due in 2038 with the same nominal face value of their current bonds. They would pay 2.5 percent to 5.25 percent a year, Argentina said.

Bondholders would also receive an immediate cash payment similar to what it provided under the 2010 debt swap, Argentina said. And they would receive derivative instruments that provide payments when the country's gross domestic product exceeds 3 percent a year.

The par option, though, is restricted to small investors, unlike the discount option, the more applicable fit for big investors like NML and Aurelius.

Under the discount proposal, holdouts could receive new discount bonds due in 2033 that pay 8.28 percent annually. Argentina said the holdouts would also receive past due interest since 2003 in the form of bonds due in 2017 paying 8.75 percent a year, and GDP-linked derivative units.

Blackman, Argentina's lawyer, wrote that the proposal, unlike what he called the "100 cents on the dollar immediately" formula Griesa adopted, "is consistent with the pari passu clause, longstanding principles of equity, and the Republic's capacity to pay."

It was unclear on Saturday how the court might view Argentina's proposals. The same three-judge panel had said in October, though, that the holdouts "were completely within their rights" to rejected prior debt swap offers.

Euginio Bruno, a lawyer and bond restructuring expert with the law firm Estudio Garrido Abogados in Buenos Aires, said the government's Friday proposal "was within expectations, considering the legal constraints on offering anything better than the terms of the 2010 restructuring."

Argentina has a "lock law" that keeps governments from improving the terms of previous restructurings.

Earlier in the week, the holdouts scored a victory over Argentina when the 2nd Circuit denied a full court review of its October ruling on the equal treatment provision.

The United States had backed Argentina in seeking the review, contending the 2nd Circuit's decision ran "counter to longstanding U.S. efforts to promote orderly restructuring of sovereign debt."

Argentina and holders of its restructured bonds say that granting the holdouts 100 cents on the dollar could complicate future sovereign restructurings around the world.

Argentine Vice President Amado Boudou repeated on Saturday that Argentina would continue repaying investors who participated in the restructuring no matter how the U.S. court case is resolved.

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